Colorado Officials Battle over DC, DB Plans

March 3, 2004 (PLANSPONSOR.com) - The state of
Colorado is locked in a political battle over whether it
should add a defined contribution (DC) plan and how it can
best whip into shape its existing underfunded defined benefit
(DB) pension program.

Governor Bill Owens has told the Colorado Public
Employees’ Retirement Association (PERA) that state
workers should be able to choose between the DB plan and
a K-plan style DC program, the Rocky Mountain News
reported. At the same time, PERA is battling state
Treasurer and PERA board member Mike Coffman who thinks
the DB plan is so drastically underfunded that changes
need to be made to members’ benefits.

The intense rhetoric has gotten to the point that
one PERA board member, Colorado Springs teacher Scott
Noller, complained that he feels as if PERA is a “ping
pong ball” between Owens and Coffman.

Owens and his staff insist they’re only trying to
be fair and to provide a retirement alternative
particularly tailored for shorter-term employees who
might work for the state for fewer than five years. “We
are not looking to damage PERA in any way,” Mary Woodard,
a senior policy adviser in the governor’s Office of
Policy & Initiatives, told the News. “We firmly
believe an expansion of the defined-contribution plan
will not damage PERA in the future.”

For its part, the PERA board isn’t ready to embrace
Owen’s notion – nervous that a DC option might
effectively drain employees and assets from the DB plan.
PERA board Chairman James Casebolt told his fellow board
members that they have to be political realists. “If we
don’t give the governor some of what he wants, he will
veto this (PERA reform legislative proposal).”We’ve got
to have the governor’s signature on this legislation.
From a practical standpoint, I don’t think we can say
no.”

The underlying issue – the DB plan’s financial health
– is not an inconsequential one.
The pension plan, with 344,619 members at year-end 2003,
has roughly $29 billion in assets – enough to pay benefits
for the foreseeable future. Yet the fund estimates that the
future benefits it owes members is $4 billion greater than
its assets, as of December 31, 2002. This unfunded
liability will grow indefinitely, based on PERA’s
assumptions, if nothing is done.

PERA has a package of proposed changes it will send
to the legislature, including a gradual increase in the
employer contribution rate and future benefits changes.
Yet PERA’s estimates, presented to the board February 20,
show that the plan – coupled with the roughly 20% return
to the PERA portfolio in 2003 – still will not pay off
the unfunded liability within 40 years, as Colorado law
requires.

“Here’s why,” PERA board Chairman Casebolt told
Coffman at the February 20 meeting in one of many sharp
exchanges. “There is a cap on contribution rates. . . .
We have a legislative problem that needs to be fixed.”
PERA made an attempt in the previous legislative session
to increase employer-contribution rates, but Owens vetoed
it.

Another issue is who exactly will provide the
defined-contribution option. Woodard said the governor’s
preference is that if PERA provides a DC option, multiple
private-sector vendors should also be in the mix to
provide more choice.

PERA’s goal is to protect its defined-benefit plan
as it is allowed to offer the defined-contribution
option. To that end, PERA’s is proposing that a portion
of the employer’s contributions in the PERA-provided DC
plan will go toward funding the liability in the defined
benefit plan.